Types of Directors in a Company

By Harish Khan 30 Minutes Read

Introduction

Director is defined under Section 2(34) of the Companies Act, 2013 as “Director” means a director appointed to the board of a company.[1]

A Director is an individual elected or appointed in accordance with the law, tasked with managing and directing a company’s affairs. Often considered the brains of the company, directors hold a pivotal role, making key decisions in board or committee meetings. It is essential for directors to operate in compliance with the provisions of the Companies Act, 2013.

A company, being an artificial person without its own mind, requires human agency to function. The individuals responsible for managing a company’s affairs are known as directors, collectively referred to as the ‘Board of Directors.’ According to Section 2(10) of the Companies Act, 2013, the term ‘Board’ or ‘Board of Directors’ in relation to a company, means the collective body of the directors of the company.[2]

Under Section 149 of the Companies Act, 2013 every company shall have board of directors where minimum three directors are required in the case of a public company, two directors in the case of a private company, and one director in the case of a One Person Company and any company can have maximum of fifteen directors but it can be extended after passing a special resolution and such class of company shall have at least one women director.[3]

Types of Directors

1) Based on Functions

A. Executive Directors

Executive directors are internal professionals involved in the daily operations of the company. They are typically full-time employees, such as whole-time directors or managing directors, responsible for the management and administration of the company. Executive directors oversee executive functions and are crucial for the effective day-to-day running of the company. They perform operational and strategic business functions such as managing people, looking after assets, hiring and firing, entering into contracts etc.

They are typically appointed through an appointment agreement, with their qualifications and remuneration thoroughly discussed beforehand. However, as per section 196 (3) of the companies act, 2013 in order to be appointed as a director one must at least be 21 years old and not more than 70 years, but if a person over 70 years is to be appointed, a nod of approval from the shareholders at the general meeting is mandatory.[4]

As per Section 196 (2) of the act, the tenure of an executive director is capped at five years, with eligibility for reappointment. However, reappointment for a subsequent term cannot occur until one year before the current term expires.[5]

There are generally two types of Executive Directors-

 i. Managing Director

A managing director is an executive director entrusted with substantial management powers, Examples of substantial management powers can include, but are not limited to Making Financial Decisions, Strategic Planning, Entering into Contracts, Appointing and Managing Employees, Acquiring and Disposing of Assets, Compliance and Legal Matters and Day-to-Day Operations, etc. This authority can be granted through the company’s Articles of Association (AOA), an agreement with the company, a resolution passed in a general meeting, or by the Board of Directors.[6] A Company public or private cannot appoint a manager along with a managing director but can appoint a whole-time director along with a managing director or manager.

ii. Whole Time Director

A whole-time director is both a director and a full-time employee of the company. According to Section 2(94) of the Companies Act, 2013, a whole-time director is defined as a director engaged in full-time employment with the company. This role also qualifies as an executive director, indicating their active involvement in the company’s daily operations.[7]

B. Non-Executive Director

Non-executive directors are external professionals not involved in the day-to-day activities of the company. While the Companies Act, 2013 does not explicitly define non-executive directors, their role is inferred from the definition of executive directors. Non-executive directors remain on the Board to provide input in specific areas and to meet legal requirements. They participate in Board meetings to make key decisions but are not engaged in the company’s daily operations. There are two types of non-executive directors-

i) Independent Director

Independent directors are individuals with specialized knowledge or networks in specific fields. They play a key role in maintaining transparency, a vital aspect of corporate governance. Companies often appoint ex-officials to these roles due to their industry expertise and experience, which are crucial for smooth company operations.

According to Section 149(2), an independent director is any director excluding the managing director, whole-time director, or nominee director and in the opinion of the Board possesses relevant expertise and experience.[8]

Section 149(4) of the Companies Act, 2013 mandates every listed public company, including those listed on the SME segment of the stock exchange, to have at least one-third of its total directors are independent directors.[9] Furthermore, the Central Government, through Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, also mandates for unlisted public companies to appoint a minimum of two independent directors under specific conditions (such as, where the paid-up share capital surpasses Rs. 10 crores, the turnover exceeds Rs. 100 crores, or the aggregate of outstanding loans, debentures, and deposits exceeds Rs. 50 crores[10]).

However, an independent director cannot serve as a director on more than seven listed companies.[11]

Qualification

According to section 149 (6) of the Act, to serve as an independent director, individuals must possess a blend of skills, experience, and knowledge relevant to the company’s business. These qualifications may encompass various fields such as law, management, sales, marketing, corporate governance, administration, research, technical operations, or other disciplines pertinent to the company’s operations.[12]

Tenure

According to Section 149 (10) of the Act, the tenure of an independent director should not surpass five years, but they are eligible for re-election for a second term. Following the conclusion of the second term, a mandatory cooling-off period of three years is required. While companies have the option to appoint independent directors for durations shorter than five years, an individual cannot be appointed for more than two terms.[13]

Meetings

All independent directors are required to convene at least once a year in the absence of non-independent directors and other company members.[14]

During these meetings, they evaluate the performances of the company’s chairperson, other directors, and the Board. Independent directors must adhere to the functions and duties outlined in the Code of Conduct provided under Schedule IV of the Companies Act, 2013.

ii) Nominee Director

Sections 149(7) and 161(3) of the Companies Act, 2013 address the role of a nominee director. According to these provisions, if permitted by the company’s Articles of Association (AOA), the Board has the authority to appoint an individual nominated by an institution in accordance with applicable laws, agreements, or by the Central or State Government in the case of government-owned companies.[15] Appointment of a nominee director is contingent upon the authorization within the Articles of Association. Nominee directors serve as representatives of stakeholders on the board, safeguarding their interests. Essentially, they ensure that the company operates in a manner that aligns with the interests of the stakeholders they represent.[16]

Appointment

As per Section 161 (3) of the act, Nominee directors are appointed through agreements, such as shareholder agreements or financing agreements, between the company and the stakeholders. It is the responsibility of the stakeholders to remunerate these nominee directors. Despite being nominated by stakeholders, a nominee director is obligated to act in good faith and in the best interests of the company.

In the landmark case of Tata Consultancy Services Limited v. Cyrus Investments Private Limited & Ors., the Court emphasized that although a nominee director may safeguard the interests of the nominator, they are obligated to prioritize the company’s best interests and refrain from restricting their discretion.[17]

In the case of Bhardwaj Thiruvenkata Venkatavaraghavan v. Ashok Arora, the Delhi High Court ruled that nominee directors are obliged to act in the best interests of the company and its shareholders, rather than solely serving the interests of their nominators.[18]

2) Based on Appointment

A. Additional Director

Section 161(1) of the Companies Act, 2013 addresses the appointment of an Additional Director. If the Board of Directors faces a significant workload, they may appoint an additional director, provided this is authorized by the company’s Articles of Association.[19]

Appointment

As per section 161 (2) of the act, Additional directors can be appointed by passing a resolution at the board meeting or through circulation. Under section 161 (1) of the act, the authority to appoint an additional director lies within the purview of the Board of Directors, bestowed upon them by the Company’s Articles of Association (AOA). Should the AOA fail to grant such powers to the Board, they are precluded from appointing an additional director.[20]

Tenure

As per section 161 (4) of the act, the tenure of an additional director extends solely until the date of the next Annual General Meeting (AGM), or the final date by which the AGM should have been conducted, whichever occurs earlier. If an individual fails to secure appointment as a director during a general meeting, they are ineligible to serve as an additional director.[21]

An additional director has the flexibility to serve as a managing or whole-time director and can also fulfil the role of a rotational director within the company. Their powers and rights are equivalent to those of other directors within the company, ensuring parity and consistency in governance.

In the case of T.M. Paul vs. City Hospital Pvt. Ltd, the court emphasized that the appointment of an additional director must not be driven by external motives, such as enhancing the dominance of the majority on the Board. This ruling underscore the importance of ensuring that appointments to directorial positions are made with integrity and in accordance with the company’s best interests.[22]

B. Alternate Director

Section 161(2) of the Companies Act, 2013 addresses the appointment of alternate directors. When a director of a company is absent from India for more than three months, an alternate director may be appointed to act on behalf of the absent director.[23]

The role of an alternate director is temporary, extending only until the original director resumes their duties. Essentially, alternate directors are designated by the Board to temporarily replace directors who are overseas and unable to attend board meetings. Despite the option for directors to participate via video conferencing, shareholders may require a physical presence on the Board, prompting the appointment of alternate directors.

In the event of an independent director’s absence, any alternate director appointed in their place must also possess the status of independence. Additionally, it is prohibited for an alternate director to serve as an alternate for another director within the same company.

Tenure

An alternate director’s term in office lasts only until the original director returns to India. During their tenure, the alternate director assumes full responsibilities and enjoys the same rights as the original director, including receiving notices for meetings. Any decisions made by the alternate director during their term are considered valid.[24]

Appointment

The appointment of an alternate director must be authorized by the Articles of Association (AOA) of the company, granting the Board the authority to make such appointments. Alternatively, the appointment can be made through a resolution passed during a general meeting or via circulation.[25]

As per section 161 (3) of the act, if the original director resigns or is removed, the alternate director will also cease to hold office unless the Board appoints them as an additional director. However, an alternate director can be designated as a rotational director only if the original director holds a rotational position.

It is important to note that an alternate director cannot serve as a proxy for the original director. Moreover, an alternate director can be appointed as a managing director, as there is no specific prohibition in the Companies Act 2013, provided they adhere to the requirements outlined in sections 195, 196, and Schedule V of the Company Act 2013.

C. Casual Vacancy Director

Section 161(4) of the Companies Act, 2013 (the “Act”) pertains to the filling of casual vacancies in the office of a director of a public company.[26] A casual vacancy arises when a director’s position becomes vacant due to reasons including:

•  Death
• Resignation
• Disqualification under the Act
• Incapacity to perform the duties of a director
• Removal by the company through a shareholders’ resolution

Appointment of Casual Vacancy Director

Section 161 (4) of the Act empowers the Board of Directors of a public company, through a resolution passed at a board meeting, to appoint a director to fill a casual vacancy. The Articles of Association (AOA) need not explicitly provide for the filling of such a vacancy. The appointment of a director to fill a casual vacancy must be made in a Board meeting.

Filing of Casual Vacancy

The Articles of Association (AOA) need not specifically authorize the Board to fill a casual vacancy. However, if the AOA prescribes a procedure for filling such a casual vacancy, that procedure must be followed. In the absence of any specified procedure in the AOA, the Board may fill the casual vacancy by passing a resolution in a Board meeting; however, this cannot be done by way of circulation. Therefore, even if the AOA is silent on the matter, the Board retains the authority to fill a casual vacancy.

Tenure

According to section 161 (4), a casual vacancy director shall hold office only until the date on which the director, in whose place they are appointed, would have held office had the vacancy not occurred. The concept of reappointment applies to the original director, not to the casual vacancy director. A casual vacancy director may be appointed as a Managing Director, but cannot be considered a rotational director.

Limitation on Appointment Power

It is important to note that Section 161(4) only applies to casual vacancies arising in the office of a director who was originally appointed by the shareholders in a general meeting. In other words, the Board cannot fill vacancies of directors they themselves appointed without shareholder approval.[27]

Public Company Requirement

The concept of a casual vacancy director and the provisions of Section 161(4) are solely applicable to public companies as defined under the Act. Private companies have different procedures for filling director vacancies.[28]

Section 161(4) of the Act streamlines the process for filling vacancies arising due to unforeseen circumstances by allowing the Board of Directors of a public company to appoint a replacement director, provided the original director was appointed by the shareholders. This ensures continuity in the company’s governance while respecting the shareholders’ ultimate authority in director selection.[29]

3) Other Types of Directors

A. Residential Director

Provisions of Section 149(3) of the Companies Act, 2013, address the residency requirement for directors. The Act introduces the concept of a Resident Director, mandating that every company must have at least one director who has resided in India for a cumulative period of not less than 182 days in the previous financial or calendar year. This requirement is applicable to all companies, whether private or public.[30]

A declaration of a Resident Director is not required. A Resident Director is treated like any other director and is required to attend at least one Board Meeting per year.

B. Women Director

The Companies Act, 2013 mandates the appointment of a woman director for certain companies. According to Section 149(1) of the Act and Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014, the following companies are required to appoint a woman director:[31]

• Every listed company.
• Every public company with a paid-up share capital of Rs. 100 crores or more. 
•  Every public company with a minimum turnover of Rs. 300 crores or more.

Time Limit for Appointment

Established companies, originally regulated by the Companies Act of 1956, are required to appoint a woman director within one year following the implementation of the Companies Act of 2013. In contrast, newly formed companies under the Companies Act of 2013 must appoint a woman director within six months of their incorporation. Failure to comply with this mandate is subject to penalties as outlined in Section 172 of the Companies Act, 2013[32].

The gravity of this mandate is evident from the ruling in Jalpower Corporation v. ROC (2016)[33] where the NCLT determined that failing to appoint a woman director is a compoundable offenses, punishable under Section 172 of the Companies Act, 2013, despite there being no harm to public interest.

Tenure

A woman director’s tenure extends until the next Annual General Meeting (AGM) following her appointment, with the right to resign at any time by giving notice to the company. She may be appointed either during the company’s registration or afterward by the Board of Directors and shareholders. If an unexpected vacancy occurs, the Board of Directors must fill it within three months or by the next board meeting, whichever comes later. No formal declaration is required for appointing a woman director.

C. Small Shareholders Director

An individual holding shares with a nominal value not exceeding Rs. 20,000 in a public company is referred to as a small shareholder. These small shareholders have the right to elect a director in a listed company, known as a Small Shareholder Director. According to Section 151 of the Companies Act, 2013, every listed company may appoint one director elected by its small shareholders[34].

Appointment

A company may appoint a Small Shareholder Director if the following conditions are met:

• The company is a Public Company; 
• The company has at least 1,000 or more small shareholders.

A company may appoint a Small Shareholder Director either on its own initiative or upon an application made by a small shareholder. The appointment of a Small Shareholder Director is optional, which is why few companies have such a director.

Rule 7 of the Companies (Appointment and Qualification of Directors) Rules, 2014 stipulates certain provisions regarding the appointment of a Small Shareholder Director as follows:[35]

• A written notice must be provided to the company by at least 1,000 small shareholders or one-tenth of the total number of small shareholders, whichever is less. This notice must be submitted at least 14 days before the General Meeting. 
• The notice must include details of the proposed director, such as name, address, folio number, and shares held. 
• The notice must be signed by the individual proposing to be the director.
• The notice must be accompanied by a statement signed by the proposed director confirming that he has a Director Identification Number (DIN), is not disqualified from serving as a director, and has consented to act as a director.

Additional Provisions Relating to a Small Shareholder Director:

• A Small Shareholder Director is eligible to qualify as an independent director in accordance with the provisions of Section 149(6) and (7) of the Companies Act, 2013.[36] 
• A Small Shareholder Director shall not be considered a retiring director.
• A Small Shareholder Director cannot be appointed as a Managing Director or Whole Time Director.
• An individual shall not hold the office of a Small Shareholder Director in more than two companies simultaneously; holding office in up to two companies is permitted, but not more than two.

Tenure

A Small Shareholder Director may be appointed for a maximum term of three years. Unlike other directors, he is not subject to retirement by rotation and cannot be reappointed once his term expires. Furthermore, he is prohibited from being associated with the company for three years after his tenure ends.

D. Shadow Director

The term “shadow director” is not explicitly mentioned in the Companies Act, 2013. A shadow director is an individual who, though not officially appointed as a director, has their directions and orders followed by the Board.

According to Section 2(60) of the Companies Act, 2013, a shadow director is defined as any person in accordance with whose directions or instructions the Board of Directors of a company is accustomed to act.

These individuals wield significant influence, akin to that of a formal director, yet avoid the associated liabilities. They issue directives that the company adheres to without holding any official managerial position.

In the case of Re Hydrodan (Corby) Ltd.[37], the concept of a shadow director was elaborated under UK company law. A shadow director is defined as an individual who, despite not holding an official directorship, exercises significant influence over the Board of Directors by providing instructions and directions regarding the company’s management. The crucial aspect is that the Board consistently follows these directions, and a majority of its members adhere to them. For an individual to be classified as a shadow director, they must be directly involved in the company’s affairs, actively participating in its management, and their influence must be continuous and substantial. This case underscores the legal accountability of shadow directors, who bear similar responsibilities as formally appointed directors despite their unofficial status.

Conclusion

Directors of a company play a critical role in its governance and strategic direction. They are entrusted with fiduciary duties to act in the best interests of the company and its shareholders. Effective directors bring a mix of expertise, leadership, and integrity to the board, ensuring sound decision-making and adherence to legal and ethical standards. Their oversight helps to balance the interests of various stakeholders, fostering corporate growth and stability. Ultimately, the quality of a company’s board of directors is pivotal to its success and long-term sustainability.

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[1] Section 2(34) of the Companies Act, 2013

[2] Section 2(10) of the Companies Act, 2013

[3] Section 149 of the Companies Act, 2013

[4] Section 196 (3) of the Companies Act, 2013

[5] Section 196 (2) of the Companies Act, 2013

[6] Section 179 of the Companies Act, 2013

[7] Section 2(94) of the Companies Act, 2013

[8] Section 149(2) of the Companies Act, 2013

[9] Section 149(4) of the Companies Act, 2013

[10] Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014

[11] Regulation 25 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

[12] Section 149, Section 149 (6) and Schedule IV of the Companies Act, 2013

[13] Section 149 (10) and 149 (11) of the Companies Act, 2013

[14] Schedule IV of the Companies Act, 2013

[15] Sections 149(7) of the Companies Act, 2013

[16] Sections 161(3) of the Companies Act, 2013

[17] Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd., 2021 SCC OnLine SC 272

[18] Bhardwaj Thuiruvenkata Venkatavraghavan vs. Ashok Arora and Ors. CRL.M.C. No. 3252/2016

[19] Section 161(1) of the Companies Act, 2013

[20] Section 161(1), 161(2) and 161(3) of the Companies Act, 2013

[21] Section 161 (4) of the Companies Act, 2013

[22]  [1999]97COMPCAS216(KER)

[23] Section 161(2) of the Companies Act, 2013

[24] Ibid

[25] Ibid

[26] Section 161(4) of the Companies Act, 2013

[27] Ibid

[28] Ibid

[29] Ibid

[30] Section 149(3) of the Companies Act, 2013

[31] Section 149(1) of the Companies Act, 2013 and Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014

[32] Section 149(1) of the Companies Act, 2013 and Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014

[33] Jalpower Corporation v. ROC (2016) 138 SCL 124

[34] Section 151 of the Companies Act, 2013

[35] Rule 7 of the Companies (Appointment and Qualification of Directors) Rules, 2014

[36] Section 149(6) and (7) of the Companies Act, 2013

[37] [1994] 2 BCLC 180